Deduction of Expenses

Expenses Incurred in Deriving Income

7.16. Besides questions of what should or should not be included in income, a host of problems arise over the identification and measurement of the expenses incurred in deriving income that have to be deducted before a figure for net income is reached. It is common to both the existing tax law and to the theory of a comprehensive tax base that such deductions be made.

7.17. A prime problem here is to achieve a practical application of the distinction between an expense in deriving income (which gives rise to a deduction) and consumption expenditure (which should not unless by some special concessional provision). Some expenses, such as for entertainment and travel discussed in Chapter 9, often involve elements of both. Drawing the distinction becomes very subtle when, for example, equipment is used which, in its luxuriousness, exceeds the commercial needs of business: as, for example, when an expensive car is employed where a more modest vehicle would serve just as well.

7.18. Very important areas of controversy arise over costs of travel to and from work and child-minding expenses. These are not now regarded as expenses of deriving income, though it is often argued that they should be. They are further examined in paragraphs 7.58–7.75. Extended to its logical conclusion, the argument leads to a notion of expense in deriving income that would include almost all personal expenditure, even that on food and clothing, in which event the income tax base would largely disappear.

7.19. Expenses in deriving income include the depreciation or amortisation of investment expenditure on assets that deteriorate through use. Issues that arise in relation to the deduction of this expenditure are considered in Chapter 8.

7.20. Certain expenses that would not usually be thought of as consumption expenditure or investment expenditure on non-deteriorating assets are denied deduction. Examples are the cost of moving business operations or of moving home to a new place of work: the cost does not relate wholly to current income, and there is no obvious asset to which depreciation might be applied. These expenses are considered in Chapters 8 and 9.

Other Deductible Expenses

7.21. From ‘net income’ as the term is used here the tax law authorises a whole series of further deductions before the taxable income is reached to which the prescribed rate scale is applied and liability determined. These are generally known as concessional deductions and for the most part are so called in the Act. They include dependant allowances, medical and education expenses, zone allowances, life

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insurance and superannuation premiums, and gifts to charities. They primarily reflect considerations of equity as well as particular social and economic policies. They are discussed in Chapters 12, 21 and 25.